C4.2 Choose one or more accounting measurement principles from the following list that you could use to discuss the accounting aspects of each of the problems 1–5 and explain your ideas.

l going concern l accruals l consistency l prudence.

1 Director: ‘The fixed assets of the business are reported at depreciated historical cost because we expect the company to continue in existence for the foreseeable future. The market value is much higher but that is not relevant because we don’t intend to sell them.’

2 Auditor: ‘We are insisting that the company raises the provision for doubtful debts from 2%

to 2.5% of debtor amount. There has been recession among the customer base and the financial statements should reflect that.’

3 Analyst: ‘I have great problems in tracking the depreciation policy of this company. It owns several airports. Over the past three years the expected useful life of runways has risen from 30 years to 50 years and now it is 100 years. I find it hard to believe that the technology of tarmacadam has improved so much in three years.’

4 Auditor: ‘We have serious doubts about the ability of this company to renew its bank overdraft at next month’s review meeting with the bank. The company ought to put shareholders on warning about the implications for the financial statements.’

5 Shareholder: ‘I don’t understand why the company gives a profit and loss account and a cash flow statement in the annual report. Is there any difference between profit and cash flow?’